What is a Yield to Maturity?

The yield to maturity is the anticipated rate of return associated with a given bond. Essentially, it is possible to calculate the yield to maturity by assuming that the bondholder will choose to retain control of the investment all the way to the maturity date. Often listed in financial reports as YTM, the yield to maturity is determined using a simple formula in conjunction with essential bits of information about the bond. Often, when the matter under discussion is the yield to maturity of a bond, the matter will simply be referred to as the yield. There are several key elements that are involved in determining a yield to maturity. One of the foundational components is the current yield on the market price. This fixed income amount helps to anchor the calculation so that it will have some relevance in the task of making a projection of future revenue generation. Along with the current market price, the par value and rate of coupon interest will also influence the accurate ...  more

The yield to maturity is an interest rate. It is an IRR (Internal Rate of Return). If you find the present value of each cash flow, discounted at the yield -- then the sum of those values is equal to the price of the bond. To find the Present Value of a single cash flow, use this formula: PV = C/(1+r)^N Here C is the payment you receive r is the one period discount rate (for US bonds, r = y/2 -- we divide by two because there are two compounding periods per year. N is the number of periods until you get the cash flow. Bond Duration is a measure of price sensitivity. If yields go up,then bond prices go down (and if yield goes down then prices go up). The duration tells you how much it should go up or down. From a mathematical point of view, the modified duration is: Mod Dur = -(dP/dy)/P -- where P is Price as a function of yield -- if you don't know any Calculus, ignore this comment) That is, the duration is the percent change in price for a small change in yield. Jeff410's definition ...  more